Venture capitalists back to funding start-ups in India

The pick-up in investor sentiment in stock market in 2014 appears to have had a knock-on effect on venture capital funds.

Investments by these funds in early-stage enterprises rose 15 per cent to $969 million over the previous year. In 2013, both the number of deals and the amount invested declined.

According to data from Venture Intelligence, the IT/ITeS segment garnered the lion’s share of the funds and did the most number of deals this year.

Investments in the sector jumped 30 per cent year-on-year. With the buzz created by the Alibabas and Flipkarts, e-commerce was the preferred sector for the VCs.

“The e-commerce space dominated both in India and globally by way of attracting funding as well as in exits,” said Gopi Pepakayala, CEO of GSViQ, which tracks growth start-ups globally.

The one expectation that did not materialise was the action in big-data and analytics, he adds.

In the investment sweepstakes, healthcare and life-sciences came a distant second, getting a fourth of the funds the IT segment received.

The average deal size, however, remained large at ₹40 crore compared with ₹23 crore in the IT sector.

But valuations in the healthcare sectors dipped. The push to multi-location operations rather than single units, along with tapering valuation may have reduced investor interest.

Education, manufacturing, energy and BFSI reported a few deals.

In manufacturing, while the number of deals dipped, the amount of funding increased to $33 million from $25 million in 2013, possibly helped by the ‘Make in India’ programme.

N Muthuraman, Director, RiverBridge Investment Advisors, said investor interest is picking up as there is a perceived demand from government departments such as the Railways, defence and space.

Education still ‘hot’ While education continued to attract investments with $30 million invested — nearly double the funding received last year — a few ‘hot’ sectors from last year lost their appeal.

For instance, food and beverage saw a sizeable dip in investor interest. Only $24 million was invested in four deals compared with $41 million in 10 deals last year.

One likely reason, according to Muthuraman, is that operating metrics in the segment have been quite poor. “Listed players such as Specialty Restaurants saw a dip in operating profits and stock performance,” he said. This has led to more caution, especially when funding small chains.

Venture investments are, however, still quite small compared to private equity investments. Data from the India Venture Capital and Private Equity Report 2014 from IIT-Madras show that India remained a key PE destination over the last decade, with the annual volume of deals in the $7-10 billion range. Venture capital flows, in contrast, remained modest — up to $1 billion a year.

Large private equity deals such as the ones in Flipkart and Snapdeal may continue to make the bang in the coming year with venture capital deals playing second fiddle.

The smaller size of venture capital deals, each around ₹20 crore, limits the area of VC operations to early-stage outfits that are yet to turn into stars.

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